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Legislative reforms to public pension benefits, coupled with higher than expected investment returns, have stanched the meteoric rise in required contributions to Oregon's public pension system, the system's actuary says.

Barring a decision by the Oregon Supreme Court that those benefit changes were unconstitutional, the news will bring relief to lawmakers' budget discussion next year and take the politically uncomfortable conversation of further pension cuts off the legislative to-do list.

Preliminary results from the actuary's biannual system valuation show that its unfunded liability - a gaping $16.3 billion at the end of 2011 - had shrunk to $8.5 billion at the end of 2013. The pension system's funded ratio also improved from 73 percent at the end of 2011 to 86 percent as of the end of last year, meaning it has 86 cents in assets for every dollar in liabilities.

Those results will be used to set individual employers' required contribution rates for the two-year budget period that begins in July 2015. Rates vary widely by employer and those individual rates won't be circulated until September. But bottom line, the average base contribution rate for public employers is set to creep up by only 1 percentage point of payroll starting in July 2015, to 17.5 percent of payroll. That's a fraction of the biannual increases in 2011 and 2013.

"It still represents a pretty heavy financial cost for most employers, and it's situational, predicated on the successful adjudication of those two bills" by the Oregon Supreme Court, said John Thomas, a Eugene financial adviser who chairs the PERS Board. "But the PERS Board is pleased. We didn't increase it, that's the good thing. We just hope we can stay the course."

The news, presented to the PERS Board on Friday, is even better for employers with PERS side accounts, which were established with the proceeds of pension obligation bonds that many public agencies issued to bet on the system's investment returns. Proceeds from those accounts trickle back to employers in the form of rate offsets. Counting those offsets, the average employers' rate, systemwide, will drop slightly, to 10.6 percent of payroll.

"When the going is good, those side account spin off a lot of money," said PERS Executive Director Paul Cleary. "But the converse is true too. It magnifies those rate effects."

Rates do vary substantially by employer. School districts without side accounts, for example, will still be paying an average of more than 20 percent of payroll into the system, while those with side accounts will average less than half that rate. Employers with side accounts also pay debt service on the bonds, though the payments don't show up in their PERS rates.

Rates were also impacted by accounting changes and the PERS Board's decision to lower its assumed earnings rate on investments from 8 percent to 7.75 percent. Returns substantially exceeded those levels in the last two years, helping PERS plug its ongoing cash flow shortfall between contributions and benefit payouts and backfill part of the unfunded liability.

Separate groups of public employees have sued the state to overturn the benefit changes that were instituted last fall, which included a reduction in annual cost of living increases and the elimination of a tax gross up for beneficiaries who live out of state and don't pay Oregon taxes.

The cases have been consolidated. The members argue that the old COLA – effectively 2 percent annually - and the benefit boost to cover tax liabilities are part of the state's constitutional contract with employees and cannot be taken away.

A decision from the court is expected next year, and the PERS Board and legislators are hopeful it comes before the Legislature adjourns its 2015 session next summer. The legislative changes, championed by Gov. John Kitzhaber, were not popular among many of his Democratic colleagues, and it's not clear there is appetite for additional reforms if they are overturned.

In other news, the PERS Board voted to take $6.7 million from its contingency reserve to cover overpayments to about 4,000 members because of a miscalculation of their final average salaries by the agency. The board voted 4-1 to cover the cost from reserves rather than take the unpopular step of reducing member benefits to repay the relatively small sum.